Operations strategy and factory size

Have you ever wondered how recreational vehicles get made? Here’s a video that gives you an idea:

If you thought that a vehicle is a vehicle, you might have expected RV assembly to look a lot like car assembly. However, RVs are sold in much smaller volume (industry sales peaked at 390,000 units in 2006 — Toyota sold north of 400,000 Camries in a down market last year) so less automation is justified. Further, if you looked at the parts of a car assembly line installing interior trim (e.g., dashboards and seats), you would see that it still fairly labor intensive. RVs are all about interior trim so it is not surprising that it takes a lot of hands to put one together.

What go me thinking about RVs is an article in today’s Wall Street Journal (Slump Hurt Some RV Makers, But Thor Goes Full Speed Ahead, Nov 17) that ties the recovery of one RV maker to its operations strategy. It is not surprising that the RV industry has gotten hammered in the recession with many workers being laid off and several firms ending up in bankruptcy. Sales this year are forecasted to be in the ballpark of 160,000 units — less than half what they were three years ago. The industry has probably gotten more press time that it really warrants because it is geographically concentrated. That is, on a national scale the number of job losses would not be overwhelming but with 70% of RV production in northern Indiana, that region quickly became a prime example of economic distress.

One player, however, has done relatively well. Thor Industries produces over 50 different RV brands (including Airstream) and has found opportunities to increase its share as the market has contracted.

For Thor, which is based in Jackson Center, Ohio, hardship created opportunity. Ron Fenech, president of Thor’s Keystone division, which is based in Goshen, figures he gained at least 1.5 percentage points of market share as competitors faltered, giving his division more than 22% of the market.

The interesting part is how they have done this:

Thor’s secret is speed. The company is willing to expand or contract rapidly, lengthening or trimming shifts daily. Two factors have made that possible: the relatively small size of its factories and the production incentive offered to its workers. By contrast, its failed rivals took on debt, and some built sprawling, expensive plants. In Goshen, Keystone operates a network of 16 factories, most of them no larger than 75,000 square feet, which is somewhat smaller than 1½ football fields.

The process uses a basic platform bought from an outside supplier that is pushed on a dolly to groups of skilled craftsmen. At different stations, plumbers, electricians and carpenters install pipes, wiring and cabinets. …The workers are paid slightly more than minimum wage, but they still covet the jobs and the productivity bonus. It’s not unusual for RV workers to earn as much as $60,000 a year, Mr. Fenech says.

Given the labor intensive nature of production, it is not surprising that they can get by with smaller plants; the economies of scale are going to be somewhat limited. What I find intriguing is whether a small plant strategy is always going to pay off. I can see that when the market is really soft (i.e., essentially everyone is closed), the smallest firm can open up and expand first. But what about in “normal” times and swings in demand are more limited? If a big factory is open, it has incentive to stay open and force the firm with smaller factories to absorb the ups and downs of the market.